Tractor Supply

GCI Company (TSCO)

C&R Buy Pitch
Current Price: $60.66
Target Price: $79.08
Implied Upside: 30.37%
4/18/2018
Agenda GCI

1. Industry Overview

2. Business Overview

3. Investment Thesis

4. Risks

5. Valuation

6. Current Portfolio Overview

7. Questions
1.0|Industry Overview GCI

• US Livestock Support Market

• Animal feed and care products
• Increasing demand for livestock
products, such as meat

• US Hardware Market
• Tools and home-improvement
goods
• Strong economy and housing
market driving demand
1.0|Industry Overview GCI

• US Pet Store market

• Over $18 billion and growing
• Pet ownership projected to
increase 4.1%
• Trend towards premium pet
products and services
1.0|Industry Overview GCI

Market Cap: $7.73 billion 52 Week High: $82.68

EPS: $3.31 52 Week Low: $49.87

2.0|Business Overview GCI

Tractor Supply
• Largest US retailer of rural lifestyle products
• Target recreational farmers and ranchers
• Examples: chicken feed, welders, grills,
hunting gear, chemical sprayers
• 7 consecutive years of dividend increases
2.0|Business Overview GCI

Petsense

• Leading rural and small market

pet supply
• Only 168 stores in 24 states -
expansion
• Pet products and
grooming/washing services
• Strong tailwinds for growth due
to favorable macrotrends
2.0| Business Overview: Management GCI

• Gregory Sandfort
• CEO since December, 2012
• Extensive leadership, management,
and operations experience
• Steve Barbaick
• President and CMO since May 2016
• Began as a buyer in 1998, and has
been with the company since then
Greg Sandfort, Tractor Supply CEO
3.0|Investment Thesis: Summary GCI

• We believe that Tractor Supply Company is an increasingly valuable

company to add to the C&R portfolio for a multitude of reasons.
Although the company may seem like a dying relic of traditional retail
that could be easily wiped out by e-commerce or other competition,
TSC operates in an appealing niche market in a geographical space
that is immune to the Amazon threat. Moreover, the company
continually invests in its moat, the most important attribute that we have
found attractive in past investments:
• 1. Investment in experiences, both in-store (DLTR) and overall (LYV)
• 2. Investment in logistics network to streamline operational efficiencies (JD)
• 3. Sacrifice of short-term profits for long-term gains (CMPR)
• And finally, we need to add a stable, traditional retail company to
balance our portfolio. Not to mention TSC pays steady and increasing
dividends.
3.0|Investment Thesis GCI

Tractor Supply is a value play:

It is trading at an attractive price due to:
1. Overblown concerns about Amazon and e-commerce
companies entering the market
2. Overblown concerns about brick-and-mortar competition
such as Home Depot, Lowes, and Walmart
3. Overblown concerns about slowing growth
3.0|Investment Thesis GCI

Tractor Supply is a value play:

Concerns about Amazon and e-commerce companies entering
the market are overblown because:
a. E-commerce has no place in rural America
i. Customer viewpoint: In-store is preferable to rural
consumers
ii. Business standpoint: The costs of reaching rural
consumers outweigh the benefits
iii. TSC Logistics Advantage
3.0|Investment Thesis GCI

E-Commerce Has No Place in Rural America:

Customer Viewpoint
• Why does e-commerce draw the urban consumer?
• Convenience - cuts down on time spent at the store
• Why doesn’t e-commerce draw the rural consumer?
• Pace of life is not nearly as fast as in cities
• Used to having to drive many miles to town
• In-store pick up of rural lifestyle products is easier and
considerably cheaper
• Farmers and ranchers value customer service and human
interaction
3.0|Investment Thesis GCI

E-Commerce Has No Place in Rural America:

Customer Viewpoint: 1960s Walmart Analogy
• This company is Walmart back in the 1960s
• Identified an area of the American population that was
underserved: people living in rural areas
• Walmart wanted their stores to be a cultural hub at the
center of towns
• Going to the store was an experience
• Tractor Supply is taking a page directly out of Walmart’s book
• Understand their consumer
3.0|Investment Thesis GCI

Tractor Supply is a value play:

Concerns about Amazon and e-commerce companies entering
the market are overblown because:
a. E-commerce has no place in rural America
i. Customer viewpoint: In-store is preferable to rural
consumers
ii. Business standpoint: The costs of reaching rural
consumers outweigh the benefits
iii. TSC Logistics Advantage
3.0|Investment Thesis GCI

E-Commerce Has No Place in Rural America:

Business Standpoint
• Why is Amazon looking at cities for HQ2?
• Easy access to large urban markets
• Why doesn’t e-commerce in rural areas make sense?
• Transportation is costly
• Lack of rural infrastructure
• Low population density
• Many TSC products are heavy, bulky, and not easily
shipped
3.0|Investment Thesis GCI

Tractor Supply is a value play:

Concerns about Amazon and e-commerce companies entering
the market are overblown because:
a. E-commerce has no place in rural America
i. Customer viewpoint: In-store is preferable to rural
consumers
ii. Business standpoint: The costs of reaching rural
consumers outweigh the benefits
iii. TSC Logistics Advantage
3.0|Investment Thesis GCI

E-Commerce Has No Place in Rural America:

TSC Logistics
• Distribution centers
• 8 and expanding (Northeast)
• Mixing Centers
• 3 and expanding (Northeast)
• Leverage data and use AI to
streamline long-term supply chain
fulfillment efficiencies
• Adapt to seasonal demand
• Inventory optimization
3.0|Investment Thesis GCI

E-Commerce Has No Place in Rural America:

Logistics: Amazon vs. TSC
3.0|Investment Thesis GCI

E-Commerce Has No Place in Rural America:

TSC Logistics
3.0|Investment Thesis GCI

E-Commerce Has No Place in Rural America:

TSC Logistics
3.0|Investment Thesis GCI

The Last Mile

3.0|Investment Thesis GCI

Tractor Supply and Petsense Cater to Rural Customers

Stockyard Kiosks BOPIS Lockers

• Order and • Convenient

pay • 45% of e-
• Dependable commerce
sales
• Increases
order size
3.0|Investment Thesis GCI

Tractor Supply is a value play:

It is trading at an attractive price due to:
1. Overblown concerns about Amazon and e-commerce
companies entering the market
2. Overblown concerns about brick-and-mortar competition
such as Home Depot, Lowes, and Walmart
3. Overblown concerns about slowing growth
3.0|Investment Thesis GCI

Tractor Supply is a value play:

Concerns about brick and mortar competition from Home Depot,
Lowes, and Walmart are overblow because:
a. TSC is heavily involved in its customers’ lives
b. TSC has a completely unique shopping experience
3.0|Investment Thesis GCI

TSC’s Competitive Moats Against Brick-and-Mortar

Community Events and Growing Loyalty Program
• Community Marketing Program
• Tractor shows, farmer’s markets, animal swaps, etc.
• Mobile Fair Tour
• 24 stops at state and county fairs
• Sponsorship of 4-H and FFA
• Neighbor’s Club loyalty launched April 2017
• Under 12 months gained over 7 million users
• PetVet clinics target their niche
3.0|Investment Thesis GCI

Tractor Supply is a value play:

Concerns about brick and mortar competition from Home Depot,
Lowes, and Walmart are overblow because:
a. TSC is heavily involved in its customers’ lives
b. TSC has a completely unique shopping experience
3.0|Investment Thesis GCI

TSC’s Competitive Moats Against Brick and Mortar

Unique Shopping Experience
3.0|Investment Thesis GCI

TSC: Other Competitors

3.0|Investment Thesis GCI

Tractor Supply is a value play:

It is trading at an attractive price due to:
1. Overblown concerns about Amazon and e-commerce
companies entering the market
2. Overblown concerns about brick and mortar competition
from Home Depot, Lowes, and Walmart
3. Overblown concerns about slowing growth
3.0|Investment Thesis GCI

Tractor Supply is a value play:

Concerns about slowing growth are overblown because:
a. TSC has continued room to grow
b. Petsense acquisition will provide significant opportunity
3.0|Investment Thesis GCI

Slowing Growth Concerns are

Overblown
TSC has room to grow
• Looking to open 80-100 stores per year
• Won’t hit target for 7-10 years
• History of revising target store count up
• Recently implemented ONETractor Strategy will
grow comparable store sales
• Target +3% growth through 2021
• Expansion of livestock feed category
• More community events
• E-Commerce improvements
• +30% overall web visits YOY
3.0|Investment Thesis GCI

Tractor Supply is a value play:

Concerns about slowing growth are overblown because:
a. TSC has continued room to grow
b. Petsense acquisition will provide significant opportunity
3.0|Investment Thesis GCI

Slowing Growth Concerns are Overblown

Petsense Acquisition
2016 2017 2018 2019

Acquisition Test and Develop Integrate Grow Petsense

Strategies ONETractor Model

• 75% of TSC customers own a pet

• Can leverage TSC customer data for PS
• Have identified areas to open 1,000 more stores
• Only 20 opening in 2018
3.0|Investment Thesis GCI

Slowing Growth Concerns are Overblown

Petsense Competition: PetSmart and Petco
4.0|Risks and Mitigants GCI

● Comparable sales growth fell through 2016, before rebounding

○ ONETractor Initiatives, loyalty programs, and management
guidance
○ Petsense expansion
● Weather patterns
○ Technological investments
○ Affects everyone
● Decreasing size and purchasing power of rural populations
○ Mitigated by TSC’s moats; profits will dry up faster for competitors
○ Rural population shrinking very slowly: 0.1% per year
■ Tremendous TSC and Petsense growth will outpace
5.0 |Comps Valuation GCI
5.0 |DCF Valuation GCI

Slight decline in revenue

growth rates across the
retail industry, culture of
complacency

Growth rate projections

based on managerial
guidance, and
mentioned growth
drivers (ONETractor,
distribution center,
5.0 |DCF Valuation GCI

Rise in Warehousing and

Assuming a steady Distribution Costs after New
costs of revenues York center is opened, then
based on historical fall/steady as warehouse
analysis becomes more efficient

SG&A projections based Advertising costs expected

on sums of related cost to remain steady as the
categories & adjusted for brand is already well-
management projections known and trusted in rural
America
5.0 |DCF Valuation GCI
5.0 |DCF Valuation GCI

Perpetuity growth rate of

2% to conservatively
reflect normal US GDP
growth rate in past
decades and nature of
traditional retail industry
5.0 |DCF Valuation GCI
5.0 |DCF Valuation GCI

● Output

○ Perpetuity weight: 33.33%

○ Terminal weight: 33.33%

○ Comps weight: 33.33%

6.0 |Current Portfolio Overview GCI

High-growth-potential holdings Stable-growth holdings

• iRobot • Dollar Tree
• JD.com • Berkshire Hathaway
• Live Nation • Altria
• Cimpress

What we’re looking to sell in the

coming weeks
• CVS
• Starbucks
8.0 |Questions? GCI

Questions?
Appendix A: DCF Assumptions GCI
Appendix B: Sensitivity Analysis GCI
Appendix C: WACC GCI
Appendix D: Rural areas are not served by e-commerce GCI